New Legislation Aims to End High-Frequency Trading but Misses Opportunity to Invest in Critical, Underfunded Public Needs
by Katherine McFate, 1/15/2015
Earlier this week, Maryland Congressman Chris Van Hollen introduced a much-needed sales tax on Wall Street transactions. The legislation would largely put an end to high-frequency trading by firms seeking to game the market.
High-frequency trading, which accounts for half of all market trades, serves no productive economic purpose. Profits from high-frequency trades are like winnings from a rigged slot machine – those with the skills and high-end technology are almost guaranteed to get to the “front of the line” for winnings while other traders are waiting their turn. These traders aren’t investing their money in new ideas and the business plans of firms; their activities have very little to do with growing the economy for average Americans. High-frequency traders generally hold the stocks they purchase for milliseconds, making the stock market more volatile for ordinary investors and pension fund managers.
Van Hollen’s legislation would impose a 0.1 percent tax on stock trades, eliminating the windfall profits of high-frequency traders. Because the tax creates such a powerful incentive to lower the otherwise unproductive churning of investments by money managers and thereby reduce trading costs, the sales tax on Wall Street is expected to have little net impact on ordinary investors.
Van Hollen’s proposal is expected to raise more than $1 trillion over the next decade – money that he proposes be used for broad-based tax cuts on families earning up to $200,000. Under the Van Hollen plan, each worker would receive a $1,000 tax credit ($2,000 for a working couple), with an additional $250 “savers credit” for those who added more than $500 to their retirement plans during the year. The plan also boosts the child care credit and further reduces the marriage penalty that can occur when both spouses work.
While we appreciate the fact that the legislation would redistribute income from Wall Street to families across America, we are concerned that it feeds a conservative theme that government programs don’t need funding, supporting the narratives of those intent on reducing the size and functions of government. In fact, a new Congressional Budget Office report shows that federal public investments as a proportion of the economy have dropped from about six percent in the 1970s to little more than two percent today.
Federal Investment as a Share of Gross Domestic Product
If we took the revenue from a Wall Street sales tax and invested in infrastructure repair, we could create millions of new jobs and bring our roads, bridges, water systems, and school buildings into the 21st century. Investing that money in education would create better teacher-student ratios and expand opportunities for kids, improving our potential for innovation, creativity, and citizenship in the future. And we need to strengthen Social Security now, as millions of baby boomers are retiring with little equity in their homes or savings in their retirement accounts. Each of these investments would do more to help middle-class families and to grow the economy than the tax cuts in the bill.
We applaud Van Hollen’s attempt to change Wall Street investment behavior and his courage in proposing a law that would redistribute American wealth. But we have underinvested in our public infrastructure, education, and retirement security for decades – and it’s time for us to channel our nation’s economic resources back into areas of the economy that will create lasting value to middle-class families and future generations.
Scott Klinger contributed to this blog post.